Advance Australia Fair: reforms from the past, challenges for the future

The national anthem of Australia has some very pertinent lyrics to our economic reform and performance path in recent decades. The reference to “free” and “wealth for toil” reflects the many positive economic reforms under Prime Ministers Hawke, Keating and Howard from the mid-1980s to mid-2000s. These were mainly in the areas of trade, finance, labour, tax, pensions and competition. These built on the beginnings of trade and finance reforms under Prime Ministers Whitlam and Fraser from the early-1970s to early-1980s. Unfortunately, from the late-2000s to the present, Australia has largely stalled under Prime Ministers Rudd, Gillard, Abbott and Turnbull. Both major political parties of Labor and Liberal-Nationals share the credit until the mid-2000s, as well as the blame since (see Figure 1).

Figure 1

Australia’s annual Economic Freedom Index score from 1970 to 2015, compiled by the Fraser Institute, is broadly consistent with this story [see above]. The Fraser index measures the degree of economic freedom present in five major areas: 1) Size of Government; 2) Legal System and Security of Property Rights; 3) Sound Money; 4) Freedom to Trade Internationally; and 5) Regulation. Australia had a low score of 6.06 out of 10 in 1975, which rose to 7.73 in 1990 in the wake of significant reforms in trade, finance and labor. This score rose yet further in 2000 to a high of 8.19 in the wake of significant reforms in tax, pensions and competition.

Historical developments

The so called “Australian Settlement” dominated the economy from the early-1900s to the early-1970s. This was the formal and informal arrangements between Big Government, Big Business and Big Labour, that incorporated both urban and rural Australia. According to Dr. Bernard Attard of the University of Leicester: “The constituencies they each represented were thus able to influence the regulatory structure to protect themselves against the full impact of market outcomes, whether in the form of import competition, volatile commodity prices or uncertain employment conditions.” He added that: “An important part of the Australian Settlement was the imposition of a uniform federal tariff and its eventual elaboration into a system of protection-all-round.” In conclusion, Dr. Attard writes: “Even before the 1970s, new sources of growth and rising living standards had been needed, but the opportunities for economic change were restricted by the elaborate regulatory structure that had evolved since Federation. … By the 1980s, however, it was clear that the country’s existing institutions were failing and fundamental reform was required.”

The Productivity Commission (PC) has played a key role in Australian economic reform since its formation in 1998, especially in trade. But the PC’s roots go much deeper. It is the lineal descendant of the Industry Commission, Industries Assistance Commission and Tariff Board, the latter of which was founded in 1921. The agricultural sector has a long history of intervention by Federal and State governments including domestic marketing arrangements and tariffs as well as a range of budgetary measures such as tax concessions, R&D funding and adjustment assistance. But by the late-1990s, tariff and border protection had been removed for barley, citrus, corn, cotton, dairy, dried vine fruits, fresh horticultural products, grain legumes, meat, oats, oilseeds, sugar, tobacco, rice, sorghum, wheat, wool and wine.

Trade-related manufacturing sector reform essentially began with the first systematic industry-by-industry review of protection in the early-1970s. This was followed by: the 25 percent tariff cut of 1973 under the Whitlam Labor Government; further tariff reductions in the late-1970s under the Fraser Liberal-Nationals Government; and phased tariff reduction programs of the late-1980s and early-1990s under the Hawke and Keating Labor governments. As a result, most manufacturing tariffs had fallen to 5 percent by the mid-1990s. The mining industry has generally received comparatively little government assistance and has been adversely affected by a lack of reforms in other areas such as in finance, labour and competition. Key reforms applying to mining included: the progressive dismantling of export and price controls from the mid-1980s with the result that by 1997 all export controls (except uranium) had been removed; and the removal of foreign investment controls by the early-1990s.

It was increasingly being recognized by the late 1970s that the Australian financial system was overly regulated and this was having many negative impacts on the effectiveness of monetary and fiscal policy, as well as on the economy more broadly. This was made worse by the ongoing development of stronger links between domestic and international financial markets. Thus, by the early-1980s, the Fraser government moved towards a more open and less regulated financial system through such reforms as: removing interest rate ceilings on all trading and savings bank deposits; withdrawing bank quantitative lending restrictions; and easing savings bank regulations. The Hawke government continued the process of financial deregulation in the mid-1980s through such reforms as: floating the Australian dollar along with most foreign exchange controls removed; removing the remaining bank interest rate ceilings; and deregulating Australian Stock Exchange membership along with inviting foreign banks to set up in Australia as subsidiaries but not branches.

From reform to stasis

There were two phases of positive labour reforms under the Hawke-Keating Labor governments in the late-1980s to early-1990s and the Howard Liberal-Nationals Government in the mid-1990s to mid-2000s. The Howard reforms were reversed in the late-2000s under the Rudd-Gillard Labor governments and then left as is under the Abbott-Turnbull Liberal-Nationals governments since. The first phase centred around the Industrial Relations Act and included such reforms as: allowing negotiating between employers and unions at the enterprise level; establishing the Australian Industrial Relations Commission for the settling of disputes and certifying agreements; and introducing the Enterprise Bargaining Principle which allowed parties to negotiate wage increases in exchange for productivity improvements, as well as allowing workplace agreements to be negotiated in non-unionised workplaces. The second phase centred around the Workplace Relations Act and included such reforms as: giving primary responsibility for industrial relations and agreement making to employers at the enterprise and workplace levels; allowing for individual contracts and non-union collective agreements; and amending the Trade Practices Act to include new anti-boycott provisions. The third phase centred around the Fair Work Act and is characterised by the Federal government: regulating the bulk of industrial awards; setting minimum wages; and having created three specialist bodies that collectively mediate disputes, provide information, register agreements, check compliance with the law and adjudicate on some key matters of labour law – i.e., the Fair Work Commission, the Fair Work Ombudsman and Fair Work Building and Construction.

Tax reforms in Australia have been a mixed bag. In the mid-1980s, the Hawke government introduced the capital gains tax and fringe benefits tax, as well as the Dividend Imputation Scheme and Foreign Tax Credit Scheme. They then reduced the corporate tax rate from 49 percent to 39 percent in the late-1980s. The Keating government reduced this rate further from 39 percent to 33 percent in the early-1990s. The Howard government reduced this rate further still from 33 percent to 30 percent in the early-2000s. They also introduced the goods and services tax (GST) in 2000 that replaced a variety of State and Federal taxes as well as Federal financial assistance grants to the States. The GST is a value-added tax of 10 percent on most goods and services sold or consumed in Australia. It is collected by the Federal government and remitted to the States as general revenue assistance subject to Horizontal Fiscal Equalization (HFE). One key problem with GST and HFE is that it incentivizes smaller and poorer States to not reduce their state-based tax burdens and government expenditures.

Government welfare payments in Australia include: allowances for carers, parents, students, the unemployed, widows and youth; supplements for carers, disabled, families, the poor and seniors; and pensions for carers, disabled, seniors and their wives, and veterans and their wives. There are income and asset tests for most of these payments. As a proportion of tax revenue, transfer expenditure declined from around 35 percent in the early-1980s to 25 percent in the late-1980s. After rising to approximately 40 percent in the early-1990s, it decreased to almost 25 percent in mid-2000s before rising again to nearly 40 percent in the late-2000s and 35 percent in 2010s. The economic reforms mentioned so far contributed to the first welfare payments fall and to a lesser extent the second. Pensions and competition reforms also contributed to the second fall, while the lack of reforms contributed to the rise since. The key pensions related reform was the superannuation guarantee introduced in 1992. It is a compulsory employer contribution to an employee’s superannuation account. Currently the contribution rate is set at 9.5 percent of employee earnings, and will gradually increase to 12 percent by 2025. It was designed to: increase individual lifetime savings so that each generation would make a greater contribution to its own retirement income; and provide a supplement that would improve post-retirement living standards above what can be afforded by the age pension.

I was one of the leaders involved in promoting, guiding and implementing Australia’s National Competition Policy (NCP) in the mid-1990s to mid-2000s. The National Competition Council still maintains a website devoted to NCP. The NCP reforms in summary were: formalizing prices oversight for government monopoly businesses; providing competitive neutrality for non-monopoly government businesses; separating the non-monopoly from the monopoly parts of large government businesses; removing anti-competitive legislation and regulation; creating a third party access regime for large monopoly infrastructure; and extending anti-trust laws to all government businesses. NCP also brought cost benefit analysis to the forefront; incentivised state and local governments to implement NCP through annual performance payments; and focused on the economically significant industries of electricity, gas, ports, public transport, rail, telecommunications, water and sewerage. The PC has undertaken three major assessments of the economic impacts of NCP (in 1995, 1999 and 2005) and concluded that NCP: (from 1995) could generate a net benefit equivalent to 5.5 percent of GDP; seeing in 1999 a boost in the level of GDP of 2.5 percent; and by 2005 did increase GDP by at least 2.5 percent above levels that would otherwise have prevailed (see Figure 2).

Figure 2

Since the economic reform heydays of the mid-1980s to mid-2000s, Australia has stalled in the areas of trade, finance, tax and pensions plus has regressed in the areas of labour and competition. The poster child for the latter is electricity. Climate and other environmental regulations and subsidies have artificially favoured uncompetitive wind and solar power over competitive coal, gas, hydro and nuclear power. The impacts over the past 10 years on the price, quantity and quality of electricity in Australia are clearly and massively negative [see chart]. Australia went from best on the planet to worst, in a relatively short period of time. And this was entirely of its own making, through bad economic policies at federal, state and local levels. But there is cause for hope. A large and increasing number of Aussies are waking up, speaking out and even voting for serious change – as evidenced in the rise (and fall?) of the three alternative right-wing parties of the Australian Conservatives, Liberal Democrats and One Nation.

Buy, sell or hold?

So, what does this all mean for investing Down Under? Given all of the positive economic reforms from the mid-1980s to mid-2000s, Australia was clearly a “buy.” This was epitomised by National Competition Policy (NCP) reforms. On the contrary, from the mid-2000s to the mid-2010s, Australia was predominantly a “sell.” This was due to the stalling of positive economic reforms, as supplemented by too many negative ones. Renewable energy regulations and subsidies best exemplify the latter. Signs at home and abroad, such as the rise of right-wing parties and the passing of the Trump tax cuts, suggest Australia is now a “hold.” This is because these will put strong pressure on the two major parties in Australia, the Liberal-Nationals and Labor, to not only put the brakes on negative policies like energy socialism but to revisit positive ones like NCP – and thus get back on track to Advance Australia Fair.

Mr Darren Brady Nelson is the Chief Economist at, and on the Advisory Board of, LibertyWorks. He is also a Heartland Institute expert who recently worked for an Australian Senator and on a Presidential Campaign.